Level 10

Level 10 introduces one of the top end aspects of modelling which is the equity waterfall. For those unfamiliar with the term, it is simply how one derives financial results from entering into what is called a joint venture partnership. Let’s take, for example, a homegrown Irish developer who knows their bricks and mortar inside out but lacks the sufficient capital (or simply does not want to allocate all their funds to one project) to deliver a 500-unit scheme to the market. Now enters party 2, a US fund which is capital heavy, has interest in the Irish market but lacks the local expertise. These two groups end up finding one another and agree to work together to meet the goals of both. Terminology can get a little sketchy when dealing with these agreements, but the understanding is generally the same, I will refer to the local developer as the ‘General Partner’, and the US fund as the ‘Limited Partner’.

There is no real agreed on standardised JV agreement, everyone will have their own flavour, so this is where you need to start getting creative with your modelling. Waterfall equity modules are completely standalone from your base project model. The beauty to this is that once you develop one, you can just copy and paste to separate projects granted that the conditions in the JV agreement are the same of course.

I have provided a very basic IRR driven equity waterfall (some may use equity multiple to drive returns) with a 4-tier hurdle system, think of ‘hurdles’ as your financial goals for a project. Our model assumes that the Limited Partner needs to get priority on returns up until the first hurdle then the General Partner can start sharing in on the profits. The General Partners equity contributions also appreciate at the rate of the first hurdle (8% in the scenario provided). This leaves the General Partner a bit starved for funds to run their business, so I’ve been nice and also implemented an Asset Management fee (managing collecting rents, maintenance, etc.) and a Development Management fee which is taken on capital expenditure throughout the acquisition/construction of the project.

Supplementary Analysis